RAND and the Moral Hazard: Healthcare Triage #10



so I'm trying to pick out my plan I have to decide if I want a high deductible doing a high copay or a high monthly premium which would try to pay the money upfront you want to pay later no no it's better that totally depends on how you like it well I don't I mean I guess I guess I would like to pay it I guess I would like it to be future meets problem rather than current means problem fine hey later okay then go with a low deductible but you're gonna have high copay you might also have Kai coinsurance you're certainly gonna have a high deductible what is coinsurance that's the stuff that doesn't fall into the copay but still is owed responsible for you what yeah remember okay fine you get to get the premium one which is enough now money and then you got the deductible but on top of the deductible you either have to pay the copay or the coinsurance every time you see a doctor this seems inefficient to me this is what we get we didn't stumble onto this system by chance the reason all of this exists is because of a very important research study done a couple of decades ago it's probably the most ambitious largest study of health insurance that has ever been done or ever will be done it was called the rand health insurance experiment and I'm going to tell you all about it in this week's healthcare triage the RAM corporation is a think-tank that was established in 1948 they perform research in all kinds of areas including health in 1972 they began an 11 year study of health insurance you see there was an ongoing debate about how insurance affects spending on health care in the United States a number of people thought that insurance caused us to spend more than we otherwise would have on health care it's part of what we refer to as the moral hazard basically the moral hazard is the idea the people who are insulated from risk behave differently than people who are exposed to it for instance if you have good car insurance you might drive less carefully because you're more protected in health care some apply the moral hazard to say that once you have good insurance you're more likely to use health care even if you don't need it in my favorite example of this because I find that amusing not because I agree if we all had employer paid grocery insurance we might all demand filet mignon instead of hamburger this would evidently lead to skyrocketing food costs mass starvation and huge piles of rotting ground beef it's important to understand the people who apply the moral hazard to health care believe the people are using too much of it and that's why our costs are so high they believe that if we somehow changed how we pay for health care and exposed people to the true cost they would become better consumers and the whole system would cost less as a theory the moral hazard in health care was first described only about 40 years ago in a seminal paper by The Economist mark Pauley and it's still just a theory like many theories it has good parts and bad it's not an undisputed law for instance recent work by another economist named John Neyman explains that the moral hazard may actually do good in health care by encouraging people who otherwise wouldn't get care to do so we want sick people to get care and think about it that supermarket example isn't even remotely comparable if I made colonoscopies free tomorrow no one would start picking them up by the Dozen if I declared that no one would ever have to pay for chemotherapy again you wouldn't ask for extra if surgeons refused to accept payment for appendectomy z' anymore would anyone go and get one just for the hell of it we have a hard enough time getting people to do the things we want them to do to be healthy without making it harder for them to do so anyone who loves he loves filet mignon no one loves going to the doctor what really matters is whether people are getting unnecessary health care what we'd really like to know is whether people would spend less if the moral hazard was removed but stay is healthy if that's the case it's a good argument for making people pay more of their own bills but if they get sicker then it's a good argument for insurance covering all the costs if you want to see if one thing causes another though you need a randomized controlled trial you might think that a randomized controlled trial of health insurance would be incredibly difficult you'd be right there have been two that I know of in the history of the United States and the rand health insurance experiment is by far the biggest contained about 2,700 families made up of people all under the age of 65 they came from six places across the United States to give it a nice geographic spread and they were all randomly assigned to one of four levels of insurance coverage they ranged that how much individuals had to pay in coinsurance from none to 25% 50% or 95% in other words they measure different levels of the moral hazard the none plan would involve no costs at all to people the 95 percent plan is much like a health savings account where almost all of the spending is out-of-pocket the researchers Interest were varied but centered on spending and health outcomes the purpose of the study was to see if increasing the amount of cost-sharing would change how people used healthcare and how their health was affected the results are complicated and have been interpreted and misinterpreted too many times to count but here's the gist of what they found people in the high deductible plans those who are most exposed to healthcare costs did spend significantly less and they consumed less healthcare and yes much of that care was unnecessary as healthy people did not suffer negative consequences from foregoing care removing the moral hazard did no harm in the majority of patients which is often touted as the result of the study because they were healthy and of course getting less care when you're healthy leads to few short-term negative results so quickly became accepted fact that increase in cost-sharing was a good thing people would use less care they'd spend less insurance expenses and therefore premiums would come down everyone wins right this is why we have deductibles co-pays and coinsurance but and this is important there were other findings in the rand health insurance experiment poor participants with hypertension saw their mortality rates rise significantly they died more this is because it turns out that people are pretty bad at telling the difference between necessary and unnecessary care if you're not healthy and you aren't rich then you're more likely to go without necessary care and you're more likely to die this debate isn't over you can still find lots and lots of arguments from people who think that we're still too shielded from health care spending they want high deductible health care plans or even the elimination of all comprehensive insurance where only catastrophic things are covered people who push for this believe that removing the moral hazard will not hurt people and will lead to significantly reduced health care spending they're not totally wrong removing the moral hazard is fine for most people yes if we make it more expensive for individuals if we demand more skin in the game if we remove the moral hazard people will seek less care and that's fine for healthy people but it's terrible for those who are ill so as we continue to reform the system keep this in mind higher deductibles co-pays and coinsurance may be good for overall health care spending but they may be bad for people's health

26 comments

  1. #Two Thumbs? This Guy. +Matthew Graham
    Have you studied the perfectly competitive market principles?
    Notice any violations, because there's at least 6 violations.
    And no, the video refutes moral hazard claim.
    So you need to add comprehension verbal and reading to your homework assignment. In fact, that might be the root cause of your ignorance… or you're among the other 2 categories willfully ignorant or a con artist praying on the ignorant and stupid. @patwams48
    I invite you to visit my site at

  2. im confused – at one point you say that those with high deductible healthcare plans (i.e. they pay 95% costs rather than 20%), spent significantly less and they consumed less healthcare. But then you say it quickly became accepted fact that increasing cost sharing (i.e. when patients pay for a portion of health care costs not covered by health insurance) was a good thing and that people would use less care and spend less. Isn't this a contraction? I'm probably being dim can you help explain please?

  3. Based on this alone, one would think income-dependent copays (preferably with single-payer) would be the natural solution, to expose people of differing income levels to the same relative degree of risk.

  4. What a ridiculous review of the moral hazard. Despite the fact that you tried to malign the position, it clearly is evident in American healthcare. Even the study just about proves it. I'm sure the results will be hotly debated because the last thing people would want to hear is that it is true that people over-utilize healthcare because they are insulated from the costs (and therefore make us libertarians/conservates look better). 

    By the way, the comparison switch from buying groceries to buying colonoscopies is ridiculous. Buying groceries is like buying gas for your car. A colonoscopy is like a car accident. Insurance already covers the latter, and no one is debating that health insurance likewise wouldn't cover catastrophic events like a colonoscopy. It's on normal doctor visits (buying food, or an oil change) is where we differ. Insurance only makes sense for high cost, low risk. If people would like to cover more than that, they need a serious argument about why that makes any sense from a logical or empirical standpoint. It is clear that covering routine checkups is not sensible. That is what the data shows as was mentioned in the video.

    However if you are worried about poor people not being able to pay the cost; and at 95% I'm sure it would be difficult, then give them a subsidy on treatment. This is exactly what Singapore does, they simply help people who cannot pay. Trying to throw the baby out with the bathwater is a terrible argument against using HSAs. Prices do ration use. This is basic supply and demand.

    How about the government take over the entire food industry instead of just subsidizing the people at the bottom? (We all have to eat right?) Obviously it was a failure, it was called the Soviet Union.

    Progressives need to wake up and believe in economics and rational decision making; it's like talking with flat-earthers

  5. would it not change the way they behave, such that they were less likely to get sick, rather than just going to the doctor more?

  6. "this is why we have deductible co-pays and co-insurance"
    And here I thought it had nothing to do with science and everything to do with my insurance company being a money grubbing whore that wants to milk it's customer base for every dime they can.

  7. Missing one thing- insurance companies are appalling bad at managing costs- an average American hospital bill has a ridiculous number of BS charges added on and they also work there prices to fit the insurance payout not their costs. Health insurance companies don't care about costs- its your money not theirs and tend to follow a policies not designed for medical efficacy but according their accountants and executives very tiny brains- which is why they like medicines for psychiatric care over more effective alternatives. The pricing mess is just the way they like to put their poor management on to consumers.  

  8. Moral hazard is not just about the amount of health care consumed, and the amounts of health care used.  Cost sharing also encourages people to seek better values in health care, to obtain necessary care at lower prices than if one doesn't share costs (and the costs can vary widely for the exact same test, procedure, or treatment).  The problem is this information is not easily available to people, and THAT is where requirements and regulations can help.

  9. Its the RAND corporation these are the guys that came up with mutually assured destruction theory.

    and employed that nut-job who were likely suffer some form of paranoia John F.ucking Nash , I mean the guy thinks that his co-workers were KGB agents because they are wearing red ties.

    Did anything good came from the RAND tink tank?
    no wonder some people became anti-science and anti intellectuals

  10. so the question comes down to… are the lives of poor people worth a few bucks in overall healthcare costs.
    and this debate isn't over?

  11. I'll always hate the English language for making the word hypothesis an alternative definition and synonym for theory. I really hope that this aberration of vocabulary doesn't exist in other languages. I mean really, who in their right minds would muddle the distinction between those words?

  12. Moral hazard doesn't necessarily refer to the quantity of the items demanded. In the case of healthcare, the point is that if there is the option between a $50 drug and a $500 drug, there is no point in choosing the $50 one. E.g. hospitals charge exorbitant rates for things like toiletries because the consumers don't feel the cost. 

  13. Appendectomy?  Yeah, probably, but only because I specifically WANT to get rid of mine.  If I ever live far away from other people, which I've often considered, its much safer to not have one.

  14. All I know is, I have schizophrenia.  I went to an emergency room back in december of '13 and I said IU didn't have health insurance.  They looked at me like I was crazy.  Granted I am, but I have the money to pay for my healthcare.  Anybody got answers to my problem?

  15. In England having the NHS means people don't consider whether it's totally 'necessary' before going to see the doctor about any symptoms. Could anyone from america explain the sort of healthcare they would consider unnecessary?

  16. "No one likes going to the Doctor" Go and be a GP in the UK and discover the, (thankfully rare) condition of lonely-patient syndrome. It seems to be caused largely by longevity and partly by urbanisation. [1] #LPS

  17. I just had my Gallbladder removed this past weekend. I am a Canadian who lives in Canada, and no cost was incurred on myself, but If I was living in the US, I would most likely be saddled with crippling catastrophic debt.

    I would most likely fall into the group of making enough money to not qualify for government assistance (I work basic manual labour construction jobs for temp agencies) but not enough to be able to afford even government health insurance in the US.

    When I walked into the ER on Saturday, I received an ECG test, 5mg of Morphine for the debilitating, vomit inducing pain in my back, 3 chest X-Rays, a CT Scan, 2 ultrasounds and at the very least 3 rounds of blood and urine lab tests, all to determine that I needed a Laparoscopic Cholecystectomy (Gallbladder Removal). I also had to spend a day and half in a hospital bed due to ER overcrowding (This was Canada Day long weekend and people were stupid).

    When I left, the only things I had to pay out of pocket was the 40 dollars parking and the 20 dollars I spent on my prescription of Tylenol-3's (Which, since I don't have supplemental insurance to cover prescriptions, is tax-deductible, so I'm getting that back next february).

    If it wasn't for the health insurance paid for by the Canadian Federal and Alberta Provincial Governments, funded by my and every other Canadians tax dollars (gladly paid, I might add), I would be bankrupt. 

    The Medical Insurance system in the United States is woefully and horribly broken. Every year, people die by the hundreds, if not thousands, because they don't have insurance and can't pay to see a doctor and seek medical help, or are left with crippling debt because they get the help they need, even when they know they can't afford it.

    Under Article 25 of The UN's Universal Declaration of Human Rights, the right to access health care for circumstances outside his/her control is covered and access to said right shouldn't affect his/her quality of living (IE saddled with crippling debt).

    The US claims that it has the greatest health care system in the world, too bad its only accessible to those who can afford it. And thats sad.

    A Civilization is judged foremost by how they treat those of its citizens who are less fortunate. So what does that say about the US where people with no insurance because they can't afford it die?

  18. I dislike your use of "it's just a theory". I'd expect someone in the scientific community to use their words much more carefully. A theory means that it is very accepted in the scientific community and is backed by a great amount of scientific evidence. Enough people misuse the word theory, please don't be one of them.

  19. Australia is currently in a situation where the prime minister wants to introduce a similar system. A co payment on gp visits, tests, procedures, and medications – basically turning Australia's medical system into a version of the American system.

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